Will Sinopec trigger Indonesia new refineries projects?
The world largest refining company Sinopec from China has decided to build the largest oil storage terminal in Southeast Asia at the Batam Free Trade Zone in Indonesia.
With a storage capacity of 16 million barrels of crude oil and refined products Sinopec is planning to invest $850 million in capital expenditure for this giant tank farm.
By comparison Sinopec main Chinese competitor, China National Petroleum Corporation (CNPC or PetroChina) operates a 14 million barrels storage terminal on Jurong Island, Singapore.
In selecting Batam in Indonesia, Sinopec will take the lead of the Southeast Asia crude oil and hydrocarbon products trading market concentrated in Singapore hub.
Sinopec is targeting to execute the construction of this PT West Point Terminal in 24 months.
In addition to the regional role of this Batam PT West Point Terminal project, Sinopec is gazing at the domestic market of Indonesia for crude oil as well as refined products and is planning to use its Batam 360 hectares of acreage to build a refinery and a petrochemical complex in a second phase.
This decision comes in a context where Indonesia is struggling for some years now to find solutions to increase its own crude oil production and its refining capacities in order to reduce its dependency on hydrocarbon imports and stop its spiraling deficit especially due to its energy unbalance.
In 10 years, Indonesia crude oil reserves came down by 22% from 5.1 billion barrels in 2001 to 4 billion barrels in 2011.
In 2008 Indonesia lost its OPEC membership status since the import of crude oil started to exceed the export.
In addition the six existing local refineries operated by the national oil company (NOC) Pertamina have a total capacity of 1 million barrels per day (b/d) when the domestic consumption of refined products is exceeding 1.4 million b/d.
So Indonesia is short of crude oil to supply its existing refineries at full capacities in the same time as these capacities are anyway too short according to the domestic demand ballooning because of the subsidized fuel.
Pertamina and SOCAR at work on refinery projects
In this context several projects of refineries were considered but none of them managed to go through so far.
In 2011, Kuwait Petroleum proposed a 300,000 b/d refinery project at Balongan in West Java, and Saudi Aramco started to work on another 300,000 b/d refinery project to be located either in Tuban, East Java, or Bontang in East Kalimantan.
With $20 billion capital expenditure, these refinery projects could have started operations in 2018.
Unfortunately the tax incentives requested by the Middle-East companies could not fit with Indonesia Government financial policy.
At such financial cost, the Indonesian Government is preferring to take the alternative solution to invest directly in such a refinery and is working on a project to be located in South Sumatra with the crude oil supplied from Iraq where Pertamina has interests in different blocks.
In parallel the State Oil Company of Azerbaijan Republic (SOCAR) and the local OSO Group are considering a $4.8 billion refinery project in Batam with a capacity of 600,000 b/d of crude oil supplied from Azerbaijan.
In this context, if SOCAR, and Sinopec, manage to settle some tax incentives agreements with the Government, Indonesia may finally build the three refineries it needs to cover its domestic consumption.